First of all, what is an ICO? It is an Initial Coin Offering, which is something that is used by startups to raise funds for a new cryptocurrency venture. If you have been looking around cryptocurrencies on Reddit or other platforms, you might have noticed that there is an “ICO boom”. What I mean by “boom”, is that there are hundreds of new ICOs appearing, around three every week. That is amazing considering that if you make some numbers, you will see that there are over 140 ICOs every year. Please note that many are scams, so make sure that if you want to collaborate raising funds on one it is not a scam.
Have you noticed how nearly all of them are built around Ethereum’s Blockchain? Why not Bitcoin’s? It should be obvious, right? BTC looks the better currency since it is more valuable, but this is not the case. Have you wondered about ICOs being built on other cheaper options? For example, why are they built on ETH instead of ETC? It is much easier and cheaper to do it on Ethereum Classic. The main reason is the development and community support; it is much higher on ETH, and that means that innovation, longevity, and confidence are raised.
How do ICOs create demand?
All of these new Initial Coin Offerings have been going for some months now, and it appears to be that it will continue to grow. Some say that there will be around 2-4 new ICOs every day in the future! In my opinion, that is too many really, I mean, you can’t keep track of all. Not long ago, ETH’s price skyrocketed, and many point out that the reason was the ICO boom. Now, the ETH balanced again, and it looks like the trend will give a rise.
Usually, when a startup releases an asset, (which in this case would be a token or cryptocurrency), it starts at a very low price, usually valued at around a couple of cents. This means that if you buy many of these and in the future, they rise up to $1 each, you will have a fortune. These have a great profitability. ICOs have three steps:
- They gather funds
- Tokens or currencies are distributed to investors
- Token/currency begins trading on an exchange
This is more or less a rough idea on how an ICO works. If someone has missed the ICO, the these will go on to buy the tokens to try and cash out some profit. Because these ICOs are based on Ethereum, investors need ETH, so they buy some more, and that is when the price of ETH rises dramatically, there are price fluctuations on the rise.
Is it if all ICOs choose the Ethereum Blockchain?
As you might have heard before, a lot of something is bad. For example, when you are on a diet, people believe that vegetables are good, and they are, but if you eat a lot of them then you are basically taken the same calories as you would by eating less of other “bad” food. Get it? 1kg of carrots= 1000 calories and 1 pizza= 1000 calories. So a lot of good, it is bad. This analogy is the same for the ICO case. Obviously, if there are thousands of ICOs being built on the same Blockchain, then something will go wrong.
ICOs choose ETH because with the ERC20 standard it is both seamless and easy to issue tokens using a smart contract. However, if these ICOs fail, then it does not help ETH, in fact, it harms its reputation and hence price could also drop. Do not be alarmed though, because this happens everywhere. You go to a pizza restaurant for example and you love it, so you start going every week. After months going to the same pizza place, one of these days they give you a bad pizza, because they ran out of tomato sauce and it doesn’t taste nice. It was unlucky, but you probably won’t come back because you think that they do not know how to make pizzas anymore, and that is how the human brain works. Let’s put it this way, we are kind of stupid living things…
The same happens to ICOs, for every 1000 good ICOs, you only need 10 bad for the ecosystem to crash. This is one of the reasons why the ETH price fluctuates so much. So it is nice that nearly all ICOs decide to use the ETH Blockchain, however, it can be quite harmful if all of them do because it only requires a small mischance for the system to crumble.
Where would you like to build your ICO on? Ethereum? Bitcoin? Tell us in the comment section down below. Let me remind you again, that not all ICOs are good, some are scams, so please be aware on what you invest on! You can check out some new ICOs on our ICO section.
And as always…
Cryptocurrencies are the near future and I believe it will change the world as we know it. Start learning with me and the rest of the CoinNoob community!